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TMI Blog2020 (9) TMI 1197X X X X Extracts X X X X X X X X Extracts X X X X ..... is not in accordance with law and hence Gr.No.2 raised by the revenue is allowed, in the facts and circumstances of the present case. Negative working capital adjustment - HELD THAT:- The grievance that advances received from AE should be considered as part of payables for computing working capital requirement is also a settled proposition. Since the issue has not been dealt with in proper perspective and there are factual contradictions, we deem it fit and appropriate to remand the issue of working capital adjustment to the TPO/AO for a consideration afresh after opportunity to the Assessee and in the light of the observations made in this order on working capital adjustment. The grievance that advances received from AE should be considered as part of payables for computing working capital requirement is also a settled proposition. Since the issue has not been dealt with in proper perspective and there are factual contradictions, we deem it fit and appropriate to remand the issue of working capital adjustment to the TPO/AO for a consideration afresh after opportunity to the Assessee and in the light of the observations made in this order on working capital adjustment. Computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an appeal by the Assessee. Both these appeals are directed against the order dated 28.01.2016 of ITO, Ward- 6(1)(1), Bangalore (hereinafter referred to as the Assessing Officer, "AO" in short) passed u/s.143(3) read with Section 144C(13) of the Income Tax Act, 1961 (Act) in relation to assessment year 2011-12. 2. The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services was an "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more AEs for the allocation or apportionment of, or any contribution to, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 107,84,88,123/- Arm's length Price (126.34% of Operating Cost) ₹ 136,25,61,895/- Price Received ₹ 128,03,26,675/- Short fall being adjustment u/s. 92CA ₹ 8,22,35,220/- Thus a sum of ₹ 8,22,35,220/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the Assessee by the AO. The DRP excluded 6 comparable companies viz.,(i) Infosys Ltd., (ii) Larsen & Toubro Ltd., (iii) Mindtree Ltd., (iv) Persistent Systems Ltd., (v) Sasken Communication Technologies Ltd., and (vi) Tata Elxsi Ltd., on the application of turnover filter of more than ₹ 200 crores. The DRP did not agree to plea of the Assessee for exclusion of Acropetal Technologies Ltd., E-Infochips Ltd., ICRA techno Analytics Ltd., Persistent Systems & Solutions Ltd., and E-Zest Solutions Ltd., To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the present case. 9. As far as Gr.No.10 raised by the Assessee is concerned, the learned counsel for the Assessee brought to our notice decision of Bangalore ITAT in the case of M/S.LG Soft India Pvt. Ltd. Vs. DCIT IT(TP)A o.52/Bang/2016 for AY 2011-12 order dated 5.8.2020. In the aforesaid decision, the Assessee was also a SWD service provider and the very same comparable companies were chosen as comparable companies in that case. The Tribunal ruled on the comparability of 7 companies with a SWD service provider such as the Assessee in which the aforesaid 5 companies sought to be excluded in this appeal by the Assessee was also a part. The following were the relevant observations of the Tribunal for excluding the aforesaid 5 companies listed in paragraph-6 above :- "10. With regard to the other 7 comparable companies, whose exclusion is challenged by the revenue in ground No.2 of its appeal, we find that exclusion of these comparables from the list of companies selected by the TPO had come up for consideration before the Bangalore ITAT in the case of Electronic for Imaging (I) Pvt. Ltd. v. DCIT [2017] 85 taxmann.com 124 [Bang. Trib]. ; Symantech Software & Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this company was engaged in manufacturing of software products and was a giant company assuming various risks. As far as Larsen & Toubro Infotech Ltd., is concerned, vide paragraph-8 page-16 of the order in the case of Electronics for imaging India Pvt. Ltd., (supra) this tribunal excluded this company on the ground of presence of onsite revenue of more than 50% and that the related party transaction was more than 15% (18.66%). 15. Respectfully following the aforesaid decisions, we uphold the exclusion of the aforesaid 7 companies from the list of comparable companies and ground No.2 raised by the assessee to this extent is dismissed. We may add that the other grounds raised by the revenue in its appeal are purely supportive of ground No.2 and are general grounds with no specific reference to instances of comparables excluded and hence dismissed." 10. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid 5 comparable companies from the list of comparable companies. 11. As far as Gr.No.12 raised by the Assessee is concerned, the facts are that the TPO computed working capital adjustment as per annexure-C to the order of Assessment. Perusal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above, it was contended that the TPO has adopted a methodology wherein the actual working capital position of the assessee had been completely ignored and arrived at a derived upper cap limit for working capital adjustment. 14. Further, the assessee also highlighted that the TPO has observed that the there is no cost associated with advances received from holding companies just because there were no debtors or inventory and therefore concluded that the cost of working capital towards such advances is zero. Accordingly, such advances are not considered in computation of working capital adjustment. 15. It was submitted that similar restriction on working capital adjustment was imposed by the TPO in the earlier AY 2009-10 which was ultimately rejected by the DRP on the ground that the TPO has no domain to force the assessee in funding its working capital requirement in a specific way. Based on the above, the assessee submitted before the DRP that the adjustment towards the working capital is to be carried out as per the approach suggested in the international guidelines and also submitted as follows:- • The advances received from AEs to be included in computation of working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables. The TPO's approach ensures this. Hence, the objection raised by the taxpayer in this regard cannot be accepted." 17. After hearing the rival submissions on this issue, we are of the view that there is no clarity on the several contradictions in the order of the TPO, which we have pointed out in the earlier paragraphs. There appears to be three grievances on the methodology of computing working capital adjustment. The first grievance is that when the working capital adjustment is positive, it should be allowed on actual without putting a cap on the working capital adjustment i.e., without restricting the working capital adjustment to the average working capital component of the comparables. The second grievance is that when the working capital adjustment is negative then there should be no adjustment on account of working capital. Third grievance is that advances received from AE should also be considered as part of payables in computing working capital of the Assessee. All the aforesaid three grievances projected by the Assessee are well founded and are supported by decisions rendered by Tribunals. The grievance of the assessee is with regard to negative working cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal turnover while computing deduction u/s.10A of the Act i.e., whatever is removed from the numerator should also be excluded from the denominator while working total turnover and export turnover for allowing deduction u/s.10A of the Act. The aforesaid decision of the jurisdictional High Court has been upheld by the Hon'ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 & Ors. dated 24.04.2018. In view of the above, we are of the view that the order of AO calls for no interference. 19. Another corporate tax issue that remains for consideration in Assessee's appeal is Gr.No. B 1 which reads as follows:- "B. Corporate tax 14. Disallowance of lease rentals claimed as revenue expenditure - ₹ 14,965,386 a. The learned AO erred in law by disallowing lease rentals paid by the Appellant during Financial Year 2010-11. b. The learned AO erred in disallowing the lease rentals while passing the final order when the same was neither disallowed in the draft assessment order nor by the Hon'ble DRP. c. Notwithstanding and without prejudice to the above, the learned AO has erred in treating the lease rental payments made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on afresh of the nature of expenses in the light of details of the expenses to be furnished by the Assessee. 22. In AY 2011-12 that is the Assessment Year which is subject matter of this appeal, the Assessee claimed depreciation on the Written Down Value [WDV] of the lease rentals capitalized in AY 2010-11 in respect of which DRP for AY 2010-11 directed the AO to allow depreciation. It was a consequential claim based on the outcome on the issue of lease rentals for AY 2010-11. The AO in his draft assessment order dated 30.3.2015 did not disallow the claim of the Assessee for deduction on account of depreciation. On objections by the Assessee before DRP, the DRP directed the AO to give effect to directions of DRP for AY 2010-11 and allow depreciation. The AO in his final assessment order which is subject matter of this appeal disallowed a sum of ₹ 1,49,65,386 instead of allowing depreciation on WDV of the sum of ₹ 1,64,45,484/- as directed by the DRP. The sum of ₹ 1,49,65,386 was arrived at by the AO by reducing a sum of ₹ 14,80,094 from the opening WDV of lease rentals of ₹ 1,64,45,484/-. The approach of the AO in the final order of assessment is not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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